Last year Comstock mined around 20 Koz gold. It should increase to around 40 Kt this year, but the real key is the economics around the millions of ounces that Comstock has found in the district. Can Comstock become a 200 Koz heap-leach producer in a great jurisdiction with some underground exploration potential? This is the Comstock Trend in Virginia City, just south of Reno, that was mined in the 1800s. The city of San Francisco was essentially built from the cash that was generated from the Comstock mine.
TGR: Do you have other positions in equities with projects in Nevada?
CM: We own Newmont Mining Corp. (NEM:NYSE) and Barrick Gold Corp. (ABX:TSX; ABX:NYSE). A lot of the value of those two companies is in their Nevada operations. I think Newmont and Barrick should merge and then spin off their combined Nevada operations into what would be one of the biggest gold mining companies in the world. Call it Nevada American. It would be huge. The market would love it.
TGR: What are some sub-$1 billion market-cap names that you are buying?
CM: We’ve been buying Midas Gold Corp. (MAX:TSX). Midas has a very good asset and very good management. Golden Meadows is a multimillion-ounce deposit in Idaho with an antimony byproduct credit. It should be a long-life, low-cost operation once built. If and when the gold price does turn around, that’s the type of deposit that the major producers will want to own. There’s a lot of exploration potential there, too.
TGR: What steps is Midas taking to develop Golden Meadows?
CM: Midas has some cash on its balance sheet and is focusing on optimizing the deposit; it’s no longer drilling. It is getting the permitting process started. Once the gold price goes up, the value in the Golden Meadows project should become more and more apparent to the market and the stock should do well.
TGR: Some of your largest positions are in royalty companies. Tell us about those.
CM: Our second biggest position is Franco-Nevada. We also have big positions in Royal Gold and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). I mentioned Virginia, and we also own Osisko Gold Royalties Ltd. (OR:TSX), a spinout from the Osisko takeover by Agnico-Eagle Mines and Yamana Gold Inc. (YRI:TSX: AUY:NYSE). These companies are perfect examples of being able to survive the downturn and benefit from it.
Franco-Nevada, for example, purchased a royalty on Midas Gold’s Golden Meadows project. Midas needed some cash so Franco-Nevada bought a royalty on the property for $15M. Midas survives because it has a very good asset. Franco benefits by getting a royalty on what could ultimately be one of the best gold mines in the world. Franco, Royal Gold and Silver Wheaton are taking advantage of the downturn. And when the gold price turns around, these companies will be generating more and more free cash flow.
TGR: What are some royalties that give Royal Gold and Silver Wheaton leverage to a dramatic rise in the gold price?
CM: Both companies have royalties on Barrick Gold’s Pascua-Lama gold-silver-copper project on the border of Chile and Argentina. Royal Gold has a sliding scale royalty that at this gold price would be 5.23% on the gold on the Chilean side of Pascua-Lama, whereas Silver Wheaton has a stream on 25% of the silver.
It would cost another $4B for Barrick to build Pascua-Lama, even if it gets the environmental permit and green light from the government, but at $1,300/oz gold and $21/oz silver the project is not viable. Once it’s built it should produce 800 Koz/year gold at zero dollar cash costs (after silver byproduct credits) and should have a 20-year mine life. It’s a great project at a higher gold price.
Both companies also have royalties on Peñasquito in Zacatecas, Mexico. Peñasquito is Goldcorp’s biggest mine and it is currently mining a higher-grade portion of the mine. The mine also has underground potential.
Royal Gold can benefit if Goldcorp brings a copper circuit into production because it gets a portion of revenue from all metals produced. If precious metals prices go up, both companies will immediately start accruing lots of cash flow from those royalties.
TGR: What about some small gold and silver explorers that you either have positions in or that you’re following?
CM: We like Eastmain Resources Inc. (ER:TSX). Eau Claire, its primary asset, is just south of Goldcorp’s Éléonore deposit in the James Bay region. Eau Claire is a high-grade deposit that could be mined using open-pit methods. The defined resource in the open pit is small, but the company has been conducting exploration drilling for two years and should publish a new resource on that deposit by the end of the summer. Eastmain could define a deposit that has over 1 Moz gold at relatively high grades—more than 4 grams per ton. The company hopes it can delineate a deposit that can produce 100 Koz/year for 10 years at relatively low cash costs. There is also greenfields potential in Eastmain’s land package and the company has had some good high-grade intercepts at depth. It’s virgin territory in terms of exploration.
TGR: How about a silver play before we let you go?
CM: We own MAG Silver Corp. (MAG:TSX; MVG:NYSE) and we have owned it for a while. Its Juanicipio deposit is a great asset in Zacatecas, Mexico. I visited the Fresnillo Plc (FRES:LSE) silver mine and saw the Juanicipio drills spinning up on the ridge from Fresnillo’s Saucito mill. The deposit is a very high-grade epithermal vein system with further exploration potential.
Fresnillo has been mining in the Zacatecas region for decades. There’s almost zero risk with building the Juanicipio mine because Fresnillo is the majority partner. It should generate lots of cash once it is up and running. MAG Silver also has exploration potential in its Cinco de Mayo project in northern Mexico where the goal is to define another economic silver deposit. It’s nice to have a good asset and management that has proven that it can add value.
TGR: What’s one thing a gold investor should know about the current market?
CM: The best thing to keep in mind is that even though this market is extremely volatile, you’re in it for the long term. It was very volatile to the downside last year; so far this year it’s been volatile to the upside. Don’t lose hope or exit on a quick run up. You’re getting insurance at a relatively cheap price by owning gold and gold mining companies.
TGR: Buy and hold still works?
CM: Yes, if you have the stomach for it.
TGR: Thanks, Chris.
Chris Mancini is a research analyst for the Gabelli Gold Fund, specializing in precious metals mining companies. He has over 15 years of investment management experience, including research analyst positions at Satellite Asset Management and R6 Capital Management. Mancini earned a bachelor’s degree in economics with honors from Boston College and is a holder of the CFA designation.
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Comstock Mining Inc., MAG Silver Corp., Mandalay Resources Corp., Primero Mining Corp. and Virginia Gold Inc. Goldcorp Inc. and Franco-Nevada Corp. are not associated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
3) Chris Mancini: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico-Eagle Mines Ltd., AuRico Gold Inc., Goldcorp Inc., Franco-Nevada Corp., Royal Gold Inc., MAG Silver Corp., Comstock Mining Inc., Barrick Gold Corp., Osisko Gold Royalties Ltd. and Eastmain Resources Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The Gabelli Gold Fund holds the following companies: Agnico-Eagle Mines Ltd., AuRico Gold Inc., Goldcorp Inc., Franco-Nevada Corp., Royal Gold Inc., MAG Silver Corp., Comstock Mining Inc., Barrick Gold Corp., Osisko Gold Royalties Ltd., Eastmain Resources Inc., Primero Mining Corp., Mandalay Resources Corp., Virginia Gold Inc., Midas Gold Corp. and Silver Wheaton Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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